Ericsson, A True Shocker For The Wireless Group (ERIC, NOK, MOT)

October 16, 2007 by Douglas A. McIntyre

Ericsson (NASDAQ:ERIC) shares are being crushed pre-market after it issued an earnings warning.  It’s been a long time since we saw a reaction in Ericsson shares like this, but shares are trading down almost 25% at $30.75 in pre-market activity.  This will actually be a 52-week low and puts it within striking distance of the two-year lows.

The company now expects sales of 43.5 billion Swedish Kronas ($6.785 Billion US), an operating income of 5.6 billion Swedish Kronas ($1.3 Billion US), and a cash flow of -1.6 billion Swedish Kronas (-$249.6 million US) for the third quarter 2007. This is below the company plan and under Wall Street estimates and according to the company is primarily a result of an unexpected shift in the business mix.  Wall Street estimates in sales were roughly $6.92 Billion for the quarter.

"The unexpected development in the quarter is mainly due to a shortfall in sales in mobile network upgrades and expansions which resulted in an unfavorable business mix that also negatively affected Group margins," said Carl-Henric Svanberg, President and CEO of Ericsson. "All other businesses performed as expected. The effect of market dynamics is always a matter of judgment. This quarter we have underestimated the effects."

The Swedish wireless and equipment maker also noted that sales of these higher margin offerings and high margin software sales are also lower than normal, which usually offset competitive pressure.

Nokia (NYSE:NOK) is seeing shares trade down 1.5% at $35.90 and Motorola (NYSE:MOT) is seeing shares trade down 0.8% at $19.18 in pre-market trading.  Motorola’s earnings are set for Wednesday.  This warning out of the company is an interesting one.  If we had the news a day ahead and got to predict the reaction, we probably would have assigned a 12% to 15% haircut prediction.  This looks quite severe and appears to have just taken away two-years of tech gains.

Jon C. Ogg
October 16, 2007